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Ronald Clifford, Esq. rclifford@blakeleyllp 18500 Von Karman Ave, Fifth Floor Irvine, CA 92612

NEW MODELS FOR THE FINANCIALLY DISTRESSED CUSTOMER TO DEAL WITH THEIR DEBT: CUSTOMERS RUSHING TO SELL ALL THEIR ASSETS THROUGH CHAPTER 11 AND THE RISE OF THE PREPACKAGED BANKRUPTCY. Ronald Clifford, Esq. rclifford@blakeleyllp.com 18500 Von Karman Ave, Fifth Floor Irvine, CA 92612

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Ronald Clifford, Esq. rclifford@blakeleyllp 18500 Von Karman Ave, Fifth Floor Irvine, CA 92612

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  1. NEW MODELS FOR THE FINANCIALLY DISTRESSED CUSTOMER TO DEAL WITH THEIR DEBT: CUSTOMERS RUSHING TO SELL ALL THEIR ASSETS THROUGH CHAPTER 11 AND THE RISE OF THE PREPACKAGED BANKRUPTCY Ronald Clifford, Esq. rclifford@blakeleyllp.com 18500 Von Karman Ave, Fifth Floor Irvine, CA 92612 V. (949) 260-0611 | F. (949) 260-0613 www.BlakeleyLLP.com Jim Fox Principal, GlassRatner 60 East 42nd Street, Suite 1062 New York, NY 10165 jfox@glassratner.com Scott Blakeley, Esq. seb@blakeleyllp.com 18500 Von Karman Ave, Fifth Floor Irvine, CA 92612 V. (949) 260-0611 | F. (949) 260-0613 www.BlakeleyLLP.com

  2. NOW IS NOT THE TIME TO REST ON OUR LAURELS The economy is improving, but chapter 11 cases continue to be filed • 76 Chapter 11 Filings in Delaware since October 2016 alone • Garden Fresh Holdings, LLC • Performance Sports Group, Ltd. • DirectBuy, Inc. • 7,450 Chapter 11 cases filed in the 12 month period ending September 30, 2016 (US Bank. Statistics – www.uscourts.gov/uscourts/Statistics)

  3. WHERE ARE WE IN THE ECONOMIC CYCLE? • The Great Recession officially ended Jun-09. • We are six years and four months into this recovery. • Only one recovery in the last 45 years lasted longer than eight years and a few months. • Based on the historical evidence, one could conclude that we are in the fourth quarter of the game in terms of this recovery and that the next recession will occur within the next couple of years. • The economies of the rest of the world look vulnerable as well. • Certain industries are more exposed to serious damage in recession.

  4. THEY FILED CHAPTER 11 WHERE? • The Delaware Train • Over the past 15 years, chapter 11 filings in Delaware have increased year over year. • In recent years, the vast majority of the larger chapter 11 filings are being filed in Delaware and New York. Approximately 70% of the large public chapter 11 filings have been filed in either Delaware or New York. • Venue Rules • Place of incorporation, place where principal assets are located, place where headquarters are located. • Recent proposed venue revisions have gone nowhere. • Most of the filings in Delaware and New York are based on place of incorporation. • Metropark USA, Inc. – Headquartered in Los Angeles, 80 stores nationwide, with only a handful of stores in New York, filed in New York. • Natrol – Headquartered in Southern California.

  5. IS DELAWARE REALLY A BETTER PLACE TO FILE CHAPTER 11? Arguments For: • Judges experienced with large chapter 11 filings • More predictability • Quicker exits Arguments Against: • Inconvenient for creditors • Judges may lack local knowledge pertinent to a case • Prevents more convenient forums from gaining experience • Expensive for both creditors and the debtors

  6. EVERY WAR IS WON BEFORE IT IS EVER FOUGHT • Prepackaged chapter 11 cases and sales of assets in chapter 11 have become increasingly common. • In both scenarios, the ending has already been orchestrated prior to the filing.

  7. CHAPTER 7 DISGUISED AS CHAPTER 11 • Section 363 of the Bankruptcy Code allows the sale of assets outside the ordinary course of a debtor’s business, while in chapter 11. • Bankruptcy Courts have read 363 to allow the sale of substantially all of the debtor’s assets in a chapter 11 sale, thereby leaving the debtor with no operations, and sometimes, no assets.

  8. CHAPTER 7 DISGUISED AS CHAPTER 11 • Reasons for Chapter 11 liquidations: • Management retains control of the sale process • Sales can be done quickly by those that may be in the best position to effectuate the sale • Allows the retention of any going concern value • May allow creditors to maintain some control over the sale proceeds • May relieve the buyer of successor liability • Ability to bind dissenting parties to the terms of the “deal” • Downsides to Chapter 11 liquidations: • Can be relatively expensive • Disrupts the purpose of chapter 11 (debtors get the benefits of chapter 11 without paying the price)

  9. Recent Asset Sales cases • Elliott v. GM LLC (In re Motors Liquidation Co.), No. 15-2844-BK(L), 2016 U.S. App. LEXIS 12848 (2d Cir. July 13, 2016). • 2nd Circuit reversed or remanded most of last year’s decision of the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) that enjoined claims against General Motors Corporation’s (“Old GM”) successor corporation General Motors LLC (“New GM”) based on faulty ignition switches and other defects in Old GM’s vehicles. • Bankruptcy Court held these claims were barred pursuant to sale order under section 363 • 2nd Circuit held that the claimants alleging damages based on pre-363 sale injuries and post-sale economic losses arising from the ignition switch defect had not received proper notice of the sale motion and had suffered harm or prejudice as a result; the lack of notice deprived them of due process and the opportunity to take part in the negotiations surrounding the sale.

  10. Recent Asset Sales cases cont. • Energy Future Holdings Corp., et al., Dkt No. 2699, Case No. 14-10979 (D. Del. Nov. 4, 2014). • Bankruptcy court was presented with bid procedure objections asserting that the boards of numerous affiliates might have conflicts of interest in connection with Energy Future’s proposed 363 sale. • The court took issue with the boards for a muddled decision-making process, noting that it was unclear that the boards of all the affiliates had properly approved the proposed sale procedures. • The court then conditioned the proposed sale process on several requirements, including that the various boards hold meetings to consider the conflict-of-interest issues and to determine how they wished to proceed in directing the company’s counsel with regard to the sale.

  11. Structured Dismissals • Settlement Agreement • Establishment of liquidating trust • Settlement of litigation claims • Release and exculpations found in Ch 11 • Protocols for reconciling and pay claims • Parties may decide to enter into a “structured dismissal” • Debtor and creditors enter into settlement agreement • Distribute and administer remaining assets • Supreme Court to settle circuit split over whether absolute priority rule applies to structured dismissals

  12. Steps to Structured Dismissals • Contact career and arrange goods in transit to be pulled back • Zero out credit limit • If you shipped goods to customers within 45 days submit reclamation notice to the debtor • If your company received payment within 90 days prior to filing date inform management about possibility of preference claim filed by trustee • Begin to build case against potential preference claims • Ask debtor for statement showing invoices and imbalances • When dispute arises with debtor over amount of prepetition claim – negotiate first, litigate last • File proof of claim with bankruptcy court before established deadline • File a claim even if you only owed small amount • Give serious consideration to joining official unsecured creditors committee

  13. Recent Structured Dismissal Cases • In re Jevic Holding Corp., 787 F.3d 173 (3d Cir. 2015). • Affirming bankruptcy court and district court, and holding that structured dismissals that deviate from absolute priority rule can be approved where traditional exits from chapter 11 are unavailable, the settlement is the best feasible way to serve the interests of the estate and its creditors, and the bankruptcy court makes findings supporting those determinations). • In re Petersburg Regency LLC, 2015 Bankr. LEXIS 3756 (Bankr. D. N.J. Nov. 2, 2015). • Court held that the case before it was an “even better” case for structured than the one in Jevic because there was no class-skipping. • In re Naartjie Custom Kids, Inc., 534 B.R. 416 (Bankr. D. Utah, July 13, 2015). • Court dismissed case over U.S. Trustee’s objection, finding that the case before it “was simply that rare case where cause is shown to alter the effect of dismissal” by including release provision, but that “[h]ad there even been a lone voice of a credit arguing against this, the Court may have arrived at a different conclusion.”

  14. Supreme Court and the Structured Dismissal • The Supreme Court will hear a case regarding Structured Dismissals this coming term • Casimir Czyzewski v. Jevic Holding Corp., Petition for Certiorari No. 15-649, Nov. 16, 2015. • Issue Being Considered • Whether the absolute priority rule applies to structured dismissals. • The absolute priority rule requires that holders of junior claims and interests receive no payment until all senior claims and interests receive payment in full. • Circuit Split • The 2nd and 3rd Circuit Courts of the United States have held that the absolute priority rule does not apply to structured dismissals. • In re Iridium Operating LLC, 478 F.3d 452 (2007); In re Jevic Holding Corp., 787 F.3d 173 (3rd Cir. 2015), affirming 2014 WL 268613 (D.Del. 2014). • The 5th Circuit Court of the United States held that all settlements outside of a plan, reached at any time in the case, must comply with the absolute priority rule. • Matter of AWECO, Inc., 725 F.2d 293 (5th Cir. 1984).

  15. THE PREPACKAGED BANKRUPTCY • Plan of Reorganization has been negotiated prior to filing the chapter 11 case. Plan confirmation is much more certain. • Vendor claims normally ride through the chapter 11 process unscathed, normally. • Preference liability is normally not an issue, normally. • There is usually a very swift exit from bankruptcy with the plan being filed alongside the petition. • Professional fees can be substantially less than in a long, hotly contested chapter 11. • What should the credit professionals be aware of?

  16. Recent Prepackaged Chapter 11 Case • In re Genco Shipping & Trading Ltd., et al., 513 B.R. 233 (Bankr. S.D.N.Y. 2014) • Debtor had ~$120 million in cash & ~$1.4 billion in secured and unsecured debt • Debtor executed a restructuring supporting agreement (RSA) with its creditors for a prepackaged reorganization plan on April 3, 2014. Plan did the following: • Converted $1.2 billion of Genco’s debt into equity of the reorganized Genco • $100 million equity rights offering and unimpairment of general unsecured claims • Distribution for its common stockholders in the form of seven-year warrants for 6% of the equity of the reorganized Genco. • April 16, 2014 - Genco commenced the solicitation process. • April 21, 2014 - Genco and certain of its subsidiaries filed for chapter 11. • Bankruptcy court approved the RSA on April 24, 2014. • Equity committee objected to confirmation of the plan; contesting the valuation of Genco’s businesses and arguing that equity was entitled to a greater distribution. • After expedited discovery and a four-day trial, the bankruptcy court overruled the objection and confirmed the prepackaged plan on July 2, 2014. The plan went into effect on July 9, 2014.

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